A surprising number of people are unaware of what happens to their superannuation upon death. Most people, for example, don’t know that superannuation does not ordinarily form part of their estate. Or, that a beneficiary nomination is not necessarily binding on the superannuation trustee.
By law superannuation death benefits must be either paid to either one or more of the member’s “dependants” or the member’s estate. The purpose of superannuation is to provide retirement benefits to members and their dependants, NOT to pay the debts of the estate. As such, the superannuation trustee will generally pay those who had a right to look to the member for ongoing financial support over the estate.
The term “dependant” means one or more of the following people:
- Spouse (including de facto partner),
- Child (including step child, adopted child), or
- Any person considered wholly or partially financially dependent on the member.
What about the nominated beneficiary? While the trustee will consider all nominated beneficiaries, the trustee may have a legal obligation to pay someone else. Binding nomination however are different to a preferred nomination. As long as it’s valid, a binding nomination is (as the name suggests) is binding and the superannuation trustee must follow it.
Another important consideration is the tax treatment of superannuation death benefit payments. Many people are unaware that payments to adult children who are NOT financially dependent at the date of death are subject to tax whereas payments to a spouse and minor children are tax-free.